3.6 Query: Section 80A of the Companies Act and arrears of preference dividend.
1. A public limited company was incorporated on 29th September, 1970, under the provisions of the Companies Act, 1956.
2. On 22nd July, 1972, the company issued 5000, 9.5% cumulative redeemable preference shares of Rs. 100/- each for the face value of Rs. 5.00 lacs. As per the terms of issue, the said preference shares were to be redeemed on the expiry of 15 years from the date of allotment thereof, but the company had option to redeem the same earlier at any time after 12 years from the date of allotment of such shares on giving not less than 3 months notice to the holders of the said shares. Accordingly, the said preference shares were to be redeemed on or before 21st July, 1987.
3. Since the company had been incurring losses and/or having carry forward accumulated losses, the company did neither pay any dividend on such preference shares nor the company was able to redeem such shares. Therefore, the company, with the consent of preference shareholders, obtained an extension of two years from the Controller of Capital Issues for redemption of such shares with increased rate of dividend from 9.5% to 14%, vide consent letter No. R-417/7/CCI/87/4817, dated 21st October, 1987. Accordingly, the said shares were finally due for redemption on or before 21st July, 1989.
4. Since the company was still having brought forward losses and was not having sufficient cash surplus, the company could neither declare any dividend on the said preference shares nor the company was in a position to redeem the said preference shares in cash.
5. The company, therefore, moved a petition before the Company Law Board, New Delhi, under section 80A of the Companies Act, 1956, for issue of fresh redeemable preference shares with retrospective effect, i.e., from 21.7.1989 for total value of preference shares together with the amount of dividend due thereon. The total amount of preference shares to be issued was arrived at as under: Rs.
(i) Face value of 5000 preference shares of 5, 00,000 Rs. 100/-each
(ii) Dividend accumulated Rs.
(a) From 22.7.1972 to 21.7.1987, i.e., for 7,12,500 15 years at the rate of 9.5% per annum.
(b) From 22.7.1987 to 21.7.1989, i.e, for 1,40,000 8,52,500 two years @ 14% per annum
Total amount for which preference shares to be issued, i.e., 13525 - 14% redeemable shares of Rs. 100/- each. 13,52,500
6. The Company Law Board vide its Order No. 40/10/90-CL-III dated 20.8.1990 accorded its consent for issue of 13525 14% redeemable cumulative preference shares of Rs. 100/- each fully paid up to the existing holders of 5000 14% redeemable cumulative shares of Rs. 100/- each. The querist has supplied a copy of the Company Law Board’s order for perusal of the Committee.
7. Controller of Capital Issues vide its consent order No. R.716/9/CCI/8/90-6288 dated 7.12.1990 has also granted its permission for issue of aforesaid shares.
8. The querist has referred the following issues for the opinion of the Expert Advisory Committee:
(a) Whether the sum of Rs. 8,52,500/- (dividend accumulated) will be deemed dividend and, if so, whether it will be payment of dividend in contravention of section 205 of the Companies Act, 1956, as the company is still having accumulated losses in books of account. Moreover, section 205 of the Companies Act, 1956, stipulates that the dividend has to be paid in cash only.
(b) Since company is still having accumulated losses in books of account, from accounting point of view, where the amount of dividend as aforesaid will be debited? Can it be debited to “Premium on Redemption of Preference Shares Account” and ultimately be debited to profit and loss account?
(c) Whether the provisions of section 194 of the Income-tax Act, 1961, will be attracted and the company will be liable to deduct the tax at source on the amount of deemed dividend as aforesaid.
(d) What will be the tax liability of the shareholders who are receiving shares in lieu of accumulated dividend. In view of their not receiving any income in cash, is it not taxable?
Opinion October 30, 1991
1. The Committee notes section 80A of the Companies Act, 1956, which states, inter alia:
“S. 80-A. Redemption of irredeemable preference shares, etc.
(1) Notwithstanding anything contained in the terms of issue of any preference shares, every preference share issued before the commencement of the Companies (Amendment ) Act, 1988,-
(a) which is irredeemable, shall be redeemed by the company within a period not exceeding five years from such commencement, or
(b) which is not redeemable before the expiry of ten years from the date of issue thereon in accordance with the terms of its issue and which had not been redeemed before such commencement, shall be redeemed by the company on the date on which such share is due for redemption or within a period not exceeding ten years from such commencement, whichever is earlier:
Provided that where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon (such shares being hereinafter referred to as unredeemed preference shares), it may, with the consent of the Company Law Board, on a petition made by it in this behalf and notwithstanding anything contained in this Act, issue further redeemable preference shares equal to the amounts due (including the dividend thereon), in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed shares shall be deemed to have been redeemed………………….”[Emphasis supplied by the Committee]
2. The Committee notes that the present position as referred to in the query is specifically covered by the provisions of section 80A. The Committee also notes that the Company Law Board has accorded its consent to the company issue fresh redeemable preference shares under proviso to sub-section (1) of section 80A. The aforesaid section clearly mentions that the preference shares may be issued to cover the arrears of preference dividend also.
3.The Committee notes that the liability for the arrears of dividend on old preference shares has crystallised due to operation of law. The Committee is of the view that while recognising such liability in the accounts, there should be a simultaneous recognition of loss arising on account of such liability in the profit and loss account. The loss should be separately disclosed in the current statement of profit and loss together with its nature and amount in a manner that its impact on current profit or loss can be perceived. Also, an appropriate disclosure should be made in the accounts explaining the transaction.
4. The Committee is also of the view that the amount of Rs. 8,52,500/- truly represents converted arrears of preference dividend. Therefore, it will be proper that if in the later years when the company makes profit and proposes to declare dividend, the aforesaid amount is first set off against the distributable profits before any dividend is declared.
5. The Committee is accordingly of the following opinion in respect of issues raised in para 8 of the query:
(a) The sum of Rs. 8,52,500/- is in the nature of the arrears of preference dividend. Preference shares have been issued to the preference shareholders in lieu of the arrears as per section 80A of the Companies Act. Since section 80A overrides the other sections of the Companies Act, section 205 does not apply where section 80A applies.
(b) Please refer to paras 3 and 4 of the opinion.
(c) The Committee refrains from expressing opinion on this issue in view of Rule 2 of Advisory Service Rules according to which the Committee does not express opinions on matters involving interpretation of law only. However, the querist may refer to sections 2(22) and 194 of the Income-tax Act, 1961.
(d) Same as (c) above. ___________________________________ |